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Chapter 12: Q1BE (page 638)

Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2017, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift feels the patent will be useful for 10 years. Prepare Taylor Swift鈥檚 journal entries to record the purchase of the patent and 2017 amortization.

Short Answer

Expert verified

To record the purchase of the patent, Patents are debited, and cash is credited by $54,000.

To record the 2017 amortization, Amortization expense is debited, and patents are credited by $5,400.

Step by step solution

01

Calculation

AmortizationExpensefordefendingthepatentsuitin2019=(CarryingvalueofpatentrecordedonJan1,2018+priceofdefendingsuit)/remainingusefullifeCarryingvalueofpatent=54,000-(2脳5,400)=43,200Remainingusefullife=10years-2yearsofamortization

02

Journal Entries

Date

Particulars

JF

Debit

Credit

Patents

$54,000

Cash

$54,000

(Being patents purchased by Salmon company)

Amortization expense

$5,400

Patents

$5,400

(Being yearly amortization recorded)

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Most popular questions from this chapter

Garfield Company purchased, on January 1, 2017, as a held-to-maturity investment, \(80,000 of the 9%, 5-year bonds of Chester Corporation for \)74,086, which provides an 11% return. Prepare Garfield鈥檚 journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.

(Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017.

Cost

\(8,600,000

Carrying amount

4,300,000

Expected future net cash flows

4,000,000

Fair value

3,200,000

Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
  2. Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
  3. The fair value of the copyright at December 31, 2018, is \)3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.

Question: (Accounting for Patents) Tones Industries has the following patents on its December 31, 2016, balance sheet.

Patent Item

Initial Cost

Date Acquired

Useful Life at Date Acquired

Patent A

\(30,600

3/1/13

17 years

Patent B

\)15,000

7/1/14

10 years

Patent C

\(14,400

9/1/15

4 years

The following events occurred during the year ended December 31, 2017.

  1. Research and development costs of \)245,700 were incurred during the year.
  2. Patent D was purchased on July 1 for \(36,480. This patent has a useful life of 9陆 years.
  3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B鈥檚 value may have occurred at December 31, 2017. The controller for Tones estimates the expected future cash flows from Patent B will be as follows.

    Year

    Expected Future Cash Flows

    2018

    \)2,000

    2019

    2,000

    2020

    2,000

  4. The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)

    Instructions

    1. Compute the total carrying amount of Tones鈥� patents on its December 31, 2016, balance sheet.
    2. Compute the total carrying amount of Tones鈥� patents on its December 31, 2017, balance sheet.

The following is selected information for Alatorre Company.

1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?

2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander鈥檚 books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?

4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Instructions:

Answer the questions asked about each of the factual situations.

Question: (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017.

1/2/17

Purchased patent (8-year life)

\( 350,000

4/1/17

Purchase goodwill (indefinite life)

360,000

7/1/17

Purchased franchise with 10-year life; expiration date 7/1/27

450,000

8/1/17

Payment of copyright (5-year life)

156,000

9/1/17

Research and development costs

215,000

\)1,531,000

Instructions

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)
See all solutions

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